Despite a turbulent few months across many emerging markets in mid-2018, Argentina is pushing ahead with growth-oriented capital markets reform, supported by a strategically important index reclassification and record-breaking international development financing.
In May 2018 Congress passed legislation reforming the role of the market regulator, the National Securities Commission (Comisión Nacional de Valores CNV), as well as loosening restrictions on the type of investments funds can make. Under the new law, closed-end mutual funds will be permitted to invest in alternative assets such as real estate or agricultural property, while also being required to raise funds through a public offering to improve accountability and transparency.
The law also seeks to broaden the private asset base through the creation of inflation-linked mortgage securities, allowing banks to issue more mortgage loans. Further measures, aimed at helping small and medium enterprise raise funds by allowing them to trade their invoices for cash, are expected to generate greater investor activity and fund local enterprise expansion.
On the regulatory front, the legislation amended previous rules that allowed the CNV to remove members of the board of private companies. While it scaled back some of the regulator’s powers, the bill also strengthened its oversight in other areas – for example, by authorising the CNV to supervise external audits of companies that raise funds publicly.
News of the reforms had an immediate impact on local markets, with the MERVAL Index – which tracks the most liquid shares – rising 6% on May 10, 2018 alone. This was followed, in June, by MSCI reclassifying Argentina as an emerging market – a coveted status it lost in 2009. The new classification, which will take effect in mid-2019, should help the country tap into the roughly $14bn worth of investment assets that are tracked against MSCI benchmarks.
It is hoped a combination of reform and reclassification will encourage more companies to list on the exchange, thereby boosting capitalisation levels, which remain low for the region. The market cap of listed Argentine companies was worth 17% of GDP in April 2018, according to figures reported in international media. Although this is up on 11.5% in 2016, it is below rates in neighbouring countries such as Chile (86%), Brazil (42%), Peru (42%), Colombia (37%) and Mexico (34%).
In addition to reinvigorating investor interest, the government hopes fresh liquidity will generate some of the capital required to finance its infrastructure development programme. Officials aim to approve a total of $26.5bn of public-private partnerships by 2022 and raise infrastructure spending to 3.5% of GDP in 2018.
Freeing the Market
The most recent reforms build on a series of free-market measures implemented in recent years. Shortly after taking office in December 2015, President Mauricio Macri’s administration lifted capital controls and eased foreign exchange restrictions – steps aimed at boosting exports and increasing foreign capital. Meanwhile, in June 2017 Argentina sold $2.75m of US dollar-denominated, 100-year bonds at a yield of 7.9%, lower than the initial rate of 8.25%, becoming only the second country in the region to do so.
However, double-digit inflation, recorded at 25.6% in March 2018, contributed to a run on the peso, which lost a quarter of its value against the dollar between January and mid-May of that year. In an attempt to stabilise the currency, the central bank raised interest rates three times in April and May 2018, from 27.5% to 40%, before the government announced it would seek relief from the IMF. A $50bn, 36-month standby agreement, concluded in June of that year, stands as the largest in the fund’s history. “The amount we received is 11 times Argentina’s quota, which reflects the international community’s support of Argentina,” Nicolas Dujovne, minister of the Treasury, told international media. The agreement had a tangible effect on Argentine paper, with over-the-counter bonds up by an average of 1.5% immediately after the negotiations were announced.